You know, it looks like it's a feature in CyanogenMod. That was my first taste of Froyo, so I guess I assumed it was built in to 2.2. But I also thought I read something about 2.2 including auto restore or whatnot.
Purchased apps will restore when you go to the downloads area in the Market, but free apps from your prior image won't show.
If you have it rooted, you should use Titanium Backup or any other backup solution to backup all you apps prior to flashing a new ROM. Then it is two steps to restore - installing Titanium Backup and doing a simple batch restore from the backup app.
I have been doing this a lot as I played around with a couple of different ROMs, and the restore worked every time, and is great if you use apps like LauncherPro because your configuration of screens etc will restore as is.